ANALYSIS: DEI Order Has Contractors Weighing Privileged Audits

An executive order targeting DEI initiatives within the workplace might be driving more companies that contract with the federal government to conduct their internal reviews of DEI programs and workforce diversity analytics under attorney-client privilege.

The executive order (E.O. 14173) signed Jan. 21 by President Trump, requires federal contractors to certify under the False Claims Act (FCA) that their DEI programs comply with federal anti-discrimination laws.

If internal audits of a federal contractor’s DEI programs—and of the employee data analytics that are tied to those programs—are privileged, the federal government might find it hard to obtain any part of the review against the contractor in an investigation or enforcement action under the executive order.

Additionally, a privileged DEI assessment could potentially mitigate risks of an FCA violation when certifying programs under the executive order, which paves the way for increased scrutiny of the legal status on federal contractors’ DEI programs and practices.

What’s more, by rescinding an earlier order that required equal employment opportunity transparency, the new order might actually have made it easier for federal contractors to use attorney-client privilege to shield their DEI-related audit data.

Broader Scope of Federal DEI Enforcement

EO 14173, along with another newly issued executive order (EO 14151), signifies how the new administration’s efforts to rein in workforce diversity have become a top enforcement priority.

But federal DEI enforcement in the workplace is not limited to enforcing a section in an executive order requiring FCA certification on DEI programs. It also extends to government demands for documentation and workforce analytics for DEI programs.

For example, in the weeks following the issue of EO 14173, the Equal Employment Opportunity Commission has issued letters asking 20 prominent law firms for employee data and documents for DEI programs to investigate possible violations for disparate treatment under Title VII of the Civil Rights Act of 1964.

Furthermore, the EEOC and the Labor Department’s Office of Federal Contract Compliance Programs, which monitors federal contractors for compliance with federal anti-discrimination laws, can share information and coordinate enforcement investigations into federal anti-discrimination claims under a memorandum of understanding. Additionally, a former Morgan, Lewis & Bockius LLP attorney’s appointment to head the OFCCP signals that the agency will play an active role in enforcing part of EO 14173. Even with legal challenges, the Fourth Circuit has ruled that EO 14173 will remain in effect during the appeals process, allowing the Trump administration to enforce the executive order.

Given these factors, federal contractors with DEI programs will be motivated to want more robust protection of their information.

Defining Legal DEI Practices Amid Ambiguity

The executive order raises more questions than answers about unlawful DEI programs. The term DEI is not specifically defined in the executive order, which characterizes “illegal DEI” as “dangerous, demeaning, and immoral race-and-sex based preferences” in violation of federal anti-discrimination laws.

The EEOC and the Justice Department also issued informal guidance clarifying that DEI is a broad term not defined in Title VII. The EEOC states “DEI initiatives, policies, programs, or practice may violate Title VII, if they involve employment actions motivated—in whole or in part—by race, sex, or another protected characteristics.”

But despite the letters and informal guidance, federal contractors still lack clear and substantive guidance on DEI certification under the executive order and legal DEI practices complying with Title VII.

Protect Confidentiality in Privilege Reviews

EO 14137 has amplified discussions about reviewing employment actions and policies with the assistance of legal counsel. In just the past severalweeks, the topic of privileged audits was addressed during webinars hosted by a large labor and employment law firm, the affirmation action practice group of another firm, and a firm specializing in federal equal employment opportunity laws.

Apart from withholding workforce-diversity practice details from the government, privileged audits give federal contractors a head start to assess and address the legal risks of its DEI practices under the current administration, potentially ensuring compliance with EO 14173. The EO doesn’t prohibit federal contractors from having a First Amendment right to express their DEI views.

Documents and data analyses from an internal review of DEI practices assisted by corporate counsel or outside attorneys are often protected by attorney-client privilege and the work product doctrine. The review’s findings and its underlying documents are kept confidential under those two confidentiality doctrines. Without attorney-client confidentiality, results from the internal DEI assessment could be disclosed to government investigators, potentially supporting claims that DEI practices violated federal anti-discrimination law.

Privileged Audits May Enhance FCA Certification

The overall FCA’s certification standards, outlined in a the US Supreme Court’s Supervalu ruling in 2023, will provide an additional incentive for federal contractors to opt for privileged DEI audits. In that case, the court ruled that essential elements of an FCA violation include the “falsity of the claim” and the party’s “knowledge of the claim’s falsity.” FCA certification requires that employers confirm that they do not have “actual knowledge” that their DEI programs violate federal anti-discrimination laws, and that they also aren’t engaging in “deliberate ignorance” or “reckless disregard.”

A privileged DEI audit can speak to those factors and allow federal contractors to make the DEI certification with greater credibility to federal government agencies, thereby reducing the risks associated with a possible FCA violation. A privileged data analysis of employment decisions may strengthen the employer’s certification that DEI programs comply with federal anti-discrimination law.

Less Transparency Than Under Prior Order

Ironically, EO 14173 opens the door for federal contractors to perform a greater number of privileged audits than they could do under EO 11246’s affirmative action regulations, which were mainly compensation audits due to the sensitivity of the information.

A non-privileged audit might include an analysis of workforce data pertaining to women and minority job applicants and the contractor’s hiring decisions. Under EO 11246 affirmative action regulations, federal contractors had to divulge such data during a “show-all” compliance audit. But now that EO 14173 revokes EO 11246, that data can now theoretically be protected under privilege.

Workforce analytics from non-privileged reviews conducted for EO 11246 compliance could offer information on measures taken to eliminate barriers to equal employment opportunities for women and minorities.

The tougher regulatory restrictions on DEI programs will result in federal contractors deciding on privileged audits of EEO practices and employee data analytics, which were previously not conducted under privilege when complying with EO 11246 affirmative action regulations.

Starting April 21, covered contractors won’t need to follow EO 11246 affirmative action regulations, but they still must comply with Title VII and other federal, state, and local civil rights laws. EO 14173 preserved preferential hiring practices for individuals with disabilities and veteran statuses, as mandated by law. For now, federal contractors are required to meet specific hiring targets for people with disabilities and designated veterans.

Strategic Planning for Compliance

EO 14173 affirms a new direction in governing employment practices in the workplaces of federal government contractors.It may have also created a sense of uncertainty and lack of clarity about Title VII compliance and enforcement under the current administration.

A “wait-and-see” approach may not be in the best interest of federal contractors, which is why they might consider a privileged audit. For contractors to get ahead of the game, the privileged audit could identify and address legal and compliance risks associated with the executive order and similar executive actions.

Other analyses of the DEI executive orders featured in the report cover corporate responses, litigation, risk factors, and state bar compliance. The full report is available to Bloomberg Law subscribers and nonsubscribers.

Bloomberg Law subscribers can find related content on our In Focus: Executive Orders & Actions and our In Focus: DEI in Employment page.

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